Analysts say the regulations, elaborating on rules concerning all aspects of brokerages, will promote the healthy growth of the country's 100-odd brokerage firms and pave a way for their overseas operations.

"The aims are, first of all, to readjust to World Trade Organization (WTO) requirements," said Wang Yuanhong, senior researcher with the State Information Center, "then to further standardize the industry and promote rule of law."

In a reflection of China's WTO membership commitments, the new rules allow foreign institutions to set up joint venture brokerages and domestic brokerages to establish or buy into brokerage companies overseas; a major improvement from a draft discussed by brokerages last year, insiders said.

"Although local brokerages currently are not strong enough to expand into foreign markets, it is the long-term trend," said Yuan Dejun, a senior analyst with the China Galaxy Securities Company, and the rules made the legal preparation."

More notably, the rules provided a legal framework for the brokerages to offer more specialized services and improve corporate governance, to strengthen them in the face of foreign competition.

The new rules allow brokerages to set up subsidiaries specializing in different operations, including asset management, online stock trading and listing consultancy and underwriting.

"That paves the way for the creation of group companies with more specialized services," Yuan said.

The model of group companies will help produce economies of scale and contain operational risks in different businesses, he said.

By setting a minimal 51 per cent stake in their specialized subsidiaries, the rules also increased channels for brokerages to usher in more funds they need badly, observers said.

Many brokerage firms are already suffering from a shortage of funds, as a chronic bearish market has slashed commission incomes.

The clearing of policy vagueness concerning online stock trading, heralding a faster growth of the business, will, however, put pressure on costly trading outlets, and lead to sharp declines in the number, Wang said.

"It will reduce trading costs and improve the speed of transactions," Wang said, "but it will take time before most investors come to accept online trading."

The new rules, the analysts claim, are also articulate in requirements on corporate governance and risk prevention, by introducing a system of independent directors and internationally prevalent capital requirements.

"Risks in brokerage companies will certainly do harm to market stability. That's why such risks are stressed in the new rules," Yuan said.

(China Daily January 8, 2002)